The Reserve Bank successfully managed the large market borrowing requirements of the central government
during 2015-16 in an orderly manner and at a lower cost despite multiple challenges such as reduction in
Held to Maturity (HTM) category and Statutory Liquidity Ratio (SLR) impacting demand, tight domestic
liquidity conditions and volatility in global financial markets. The maturity profile was elongated with a 40-
year issuance. State government borrowings were managed at a lower cost, despite increase in supply mainly on
account of issuance of UDAY bonds. The Ways and Means Advances (WMA) limits of the state governments
were increased following the recommendations of the Advisory Committee on the same. During the year, the
Medium Term Debt Management Strategy was formulated in consultation with the central government and
placed in public domain. The agenda for 2016-17 includes formulating market making scheme for enhancing
g-sec market liquidity, working towards better information sharing and daily cash flow forecasting through the
Cash Coordination Committee (CCC), improving the design of Sovereign Gold Bond (SGB) to attract retail
investors, imparting liquidity to State Development Loans (SDLs) and better liability management operations.
VII.1 The Reserve Bank has the obligation and
the right to transact central government’s business
in India and manage its public debt in terms of
Sections 20 and 21 of the Reserve Bank of India
Act, 1934. As per the bilateral agreement signed
under Section 21A, the Reserve Bank manages
debt of all the 29 state governments and the Union
Territory of Puducherry. It also acts as a banker
to States, except Sikkim. Further, the Reserve
Bank provides short-term credit to the central
and state governments through Ways and Means
Advances (WMA) to bridge temporary mismatch
in their cash flows, in terms of Section 17(5) of the
Reserve Bank of India Act, 1934. The Internal Debt
Management Department of the Reserve Bank
manages the operations relating to the central and
state governments’ market borrowings.
Agenda for 2015-16: Implementation Status
VII.2 During the year, the Reserve Bank
successfully managed the large borrowing
programme of the central government and the
states in an orderly manner in the face of multiple
challenges including reduction in HTM category of banks’ investments, reduction in SLR in an
environment of tight liquidity, increased issuances
by state governments and global uncertainties.
VII.3 The central government in consultation
with the Reserve Bank designed a SGB scheme
as an alternative to the purchase of metal gold.
The Reserve Bank manages the scheme on behalf
of the Government and issued three tranches
of SGBs during the fiscal year 2015-16 (Box
VII.1). Further, the Government of India (Ministry
of Power) had formulated the Ujwal DISCOM
Assurance Yojana (UDAY) scheme on November
20, 2015 with the objective to improve operational
and financial efficiency of the state DISCOMs.
The Reserve Bank during 2015-16 issued UDAY
bonds for a total amount of ₹990 billion with a
fixed spread of 75 bps over the FIMMDA g-sec
yield. In 2016-17 so far, the issuance spread
ranged between 63-74 bps for ₹495 billion. The
response to the UDAY issuances has been robust
and appears not to have had any adverse impact
on the g-sec yields nor have the Uday issuances
crowded out the SDL market. Price discovery for the UDAY issuances has also been efficient for
the state governments.
Box VII.1
Sovereign Gold Bond Scheme
India is one of the largest consumers of gold in the world,
accounting for around one-fourth of the total consumption.
Gold imports accounted for 8.4 per cent of total merchandise
imports in 2015-16. Thus, efforts to ease the pressure on
the current account deficit (CAD) from gold imports have
to incorporate a plausible strategy to moderate demand for
gold by providing a safe alternative. Accordingly, three gold
related schemes – the Gold Monetisation scheme, the Gold
Coin Minted in India scheme and the Sovereign Gold Bond
(SGB) scheme – were unveiled by the Government of India
during 2015-16.
The SGB scheme is managed by the Reserve Bank on
behalf of the Government of India. The scheme provides
investors an assured nominal return besides savings in
terms of storage costs for gold. There is no physical gold
involved in the transactions. An investor pays the current
price of gold and on maturity receives the price prevalent
on that date. A coupon of 2.75 per cent per annum is paid on a half-yearly basis. The bond is denominated in grams of
gold with a cap of 500 grams per person per financial year.
The tenor of the bond is for eight years, with the option of
premature redemption after five years. Collection of SGBs is
through banks, FIs, stock exchanges and post offices. SGBs
can be used as collateral for loans. KYC norms for SGBs are
similar to those for investments in physical gold.
The first tranche of SGBs was launched in November 2015.
Subsequently, two tranches were floated in January and
March 2016. Overall, subscriptions denominated in units
of gold were at 4,904,130 grams amounting to ₹13 billion.
Approximately, 0.4 million retail investors were successfully
allotted SGBs, both in physical and dematerialised forms
through the Reserve Bank’s e-Kuber (CBS) platform. The
fourth tranche, the first in 2016-17, which was floated in July
2016, witnessed increased investor demand with a total
mobilization of ₹9.21 billion.
Debt Management of the Central Government
VII.4 Gross market borrowings of ₹6,000 billion
were proposed in the Union Budget 2015-16
through dated securities, of which ₹150 billion
was allocated for issue of SGBs. The actual
gross market borrowings through dated securities
were ₹5850 billion and the net borrowings
were ₹4406 billion which funded 82 per cent
of the gross fiscal deficit (GFD) as against 89
per cent in the previous year. The net market
borrowings of the central government, (i.e.,
through dated securities and T-bills) declined to
₹4,530 billion in 2015-16 from ₹4,778 billion in
2014-15 (Table VII.1).
Debt Management Operations
VII.5 The weighted average yield of dated
securities issued during the year declined to
7.89 per cent from 8.51 per cent in 2014-15
(Chart VII.1). The yields which were stable for most part of the year, however, hardened during
the second half. This was mainly on account of
large and continuous supply of central and state
governments securities, uncertainties over UDAY
bonds and concerns over fiscal consolidation, in
particular, on the implementation of One-Rank-
One-Pension and the seventh pay commission’s
recommendations. There was, however, an
overall softening in yields across tenors from
end-February 2016 following the government’s
budget announcement adhering to the fiscal
consolidation path; clarifications on the private placement of UDAY bonds and their classification
under the HTM category; reduction in the small
savings rate; net open market purchases;
expectations of better monsoon and rate cuts.
A further decline in yield was driven by ample
liquidity, expectations on passage of the GST
Constitutional Amendment Bill and increased FPI
activity amid increased global uncertainties, post
Brexit.
Table VII.1: Net Market Borrowings of the
Central Government |
(₹ billion) |
Item |
2013-14 |
2014-15 |
2015-16 |
2016-17* |
1 |
2 |
3 |
4 |
5 |
Net Borrowings |
5,079 |
4,778 |
4,530 |
2,326 |
(i) Dated Securities |
4,685 |
4,532 |
4,406 |
1,632 |
(ii) 91-day T-bills |
207 |
114 |
63 |
640 |
(iii) 182-day T-bills |
122 |
9 |
-40 |
48 |
(iv) 364-day T-bills |
65 |
122 |
101 |
6 |
*: Up to August 16, 2016. |
VII.6 There was devolvement on primary
dealers (PDs) in nine instances for an amount of ₹110 billion in 2015-16 as compared to four
instances for ₹53 billion in 2014-15. Devolvements
were mostly in later half of the year on account of
stressed market conditions arising out of concerns
over UDAY bonds supply and global volatility. The
share of PDs in subscriptions to primary auctions
stood at 54.2 per cent in 2015-16 as compared to
51.8 per cent in 2014-15.
VII.7 The Reserve Bank continued with the
policy of passive consolidation of g-secs by way
of reissuances. Out of 161 securities auctioned
in 2015-16, 154 securities were reissues of
the existing securities. In order to manage the
maturity profile and reduce rollover risks of the
government debt in a proactive manner, buybacks
and switches were conducted in the fourth quarter
of 2015-16 for an amount of ₹749 billion (₹579
billion in the previous year). This has modulated
redemption pressures and reduced the quantum
of gross borrowing requirement for 2016-17.
VII.8 Reflecting the strategy of maturity
elongation, the weighted average maturity of
borrowings increased to 16.0 years in 2015-16
from 14.7 years in 2014-15. Consequently, the
weighted average maturity of outstanding debt
increased to 10.5 years in 2015-16 from 10.2 years
in 2014-15 (Table VII.2). The weighted average
cost of outstanding market loans remained the same at 8.08 per cent during 2015-16. However,
the cost has marginally declined to 8.05 per cent
during 2016-17 (up to August 16, 2016).
Table VII.2: Market Loans of Central Government – A Profile |
(Yield in per cent/ Maturity in years) |
Years |
Range of YTMs at Primary Issues |
Issued during the Year |
Outstanding Stock |
Under 5 years |
5-10 years |
Over 10 years |
Weighted
Average
Yield |
Range of
Maturities |
Weighted
Average
Maturity |
Weighted
Average
Maturity |
Weighted
Average
Coupon |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
2011-12 |
8.21-8.49 |
7.80-10.01 |
8.25-9.28 |
8.52 |
5-30 |
12.66 |
9.60 |
7.88 |
2012-13 |
8.82-8.21 |
7.86-8.76 |
7.91-8.06 |
8.36 |
5-30 |
13.50 |
9.66 |
7.97 |
2013-14* |
7.22-9.00 |
7.16-9.40 |
7.36-9.40 |
8.41 |
6-30 |
14.23 |
10.00 |
7.98 |
2014-15* |
- |
7.66-9.28 |
7.65-9.42 |
8.51 |
6-30 |
14.66 |
10.23 |
8.08 |
2015-16* |
- |
7.54-8.10 |
7.59-8.27 |
7.89 |
6-40 |
16.03 |
10.50 |
8.08 |
2016-17@ |
- |
7.05-7.61 |
7.20-7.87 |
7.52 |
5-40 |
14.37 |
10.53 |
8.05 |
Note: YTM: Yield to Maturity; -: No Issues; *: Excluding buyback/ switch in GoI securities. @ Upto August 16, 2016. |
Table VII. 3: Issuance of Government of India Dated Securities - Maturity Pattern |
(Amount in ₹ billion) |
Residual Maturity |
2013-14 |
2014-15 |
2015-16 |
2016-17* |
Amount
raised |
Percentage
to total |
Amount
raised |
Percentage
to total |
Amount
raised |
Percentage
to total |
Amount
raised |
Percentage
to total |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
Less than 5 years |
110 |
2.0 |
- |
- |
- |
- |
150 |
5.9 |
5 - 9.99 years |
2,305 |
40.9 |
2,350 |
39.7 |
2,000 |
34.2 |
840 |
32.9 |
10 - 15.99 years |
1,340 |
23.8 |
1,510 |
25.5 |
1,600 |
27.4 |
870 |
34.1 |
16 - 19.99 years |
930 |
16.5 |
960 |
16.2 |
1,120 |
19.1 |
340 |
13.3 |
20 years & above |
950 |
16.9 |
1,100 |
18.6 |
1,130 |
19.3 |
350 |
13.7 |
Total |
5,635 |
100.0 |
5,920 |
100.0 |
5,850 |
100.0 |
2,550 |
100.0 |
*: As on August 16, 2016. |
VII.9 In view of limited space for issuance in
maturities less than 10 years, about 66 per cent
of the market borrowings were raised through
issuance of dated securities with a residual
maturity of 10 years and above in 2015-16 as
compared to 60 per cent in 2014-15, leading to
a decline in the share of maturities less than
10 years by the end of the year (Table VII.3). To
cater to the demand from long-term investors like
insurance companies and pension funds, a 40-
year security was also issued in 2015-16.
VII.10 Commercial banks remained the largest
holders of dated securities, accounting for around
40 per cent as at end-June 2016 (43 per cent
as at end-March 2015) followed by insurance
companies and provident funds. The share of
the Reserve Bank’s holdings increased to 14.9
per cent as on end-June 2016 as compared with
13.5 per cent as on end-March 2015, mainly on
account of net outright OMOs purchases.
Medium Term Debt Management Strategy
VII.11 A Medium Term Debt Management
Strategy (MTDS) was formulated by the Reserve
Bank in consultation with the Government and placed in the public domain on December 31,
2015. The MTDS has been articulated for a period
of three years (2015-16 to 2017-18). It is premised
on three broad pillars: low costs, risk mitigation
and market development in line with the sound
international practices while factoring in domestic
economic and financial conditions. The low cost
objective is pursued through measures such
as planned and predictable issuances, suitability
of instruments as per investor preferences and
improved transparency through timely and
appropriate communication to the market. The
strategy adopted to contain rollover risks include
switches/buybacks, elongation of maturity and
placement of limits on issuances and annual
maturities. Interest rate risks were dealt with
by keeping the floating rate debt low; foreign
currency risks were addressed by issuing debt in
domestic currency, developing a stable domestic
investor base and a calibrated opening of the
g-secs market to foreign investors. The Reserve
Bank will continue to develop the g-secs market
by introducing new instruments, expanding
the investor base and strengthening market
infrastructure. Stress tests and scenario analyses
in relation to costs, maturity and potential risks
suggest that the Government of India’s debt is
stable and sustainable over the medium to long
run.
Treasury Bills
VII.12 T-Bills were issued essentially to smoothen
the Government’s temporary funding gaps. The net
issuance of T-bills was lower during 2015-16 than
in the previous year. The yields on T-bills softened
during the year reflecting the easing interest
rate regime. Primary Dealers (PDs) individually
achieved the stipulated minimum success ratio
and their aggregate share in T-bill auctions stood
at 75.4 per cent in 2015-16, down from 77.2 per
cent during 2014-15.
Cash Management of the Central Government
VII.13 The Government’s WMA limits for the
first and second halves of 2015-16 were fixed
at ₹450 billion and ₹200 billion, respectively.
The Government’s cash position was largely
comfortable as it started the year with a large cash
balance of ₹1,573 billion. Recourse to WMA was
limited to 16 days in 2015-16 vis-à-vis 61 days in
the previous year (including 16 days of overdraft),
reflecting relatively fewer gaps between receipts
and expenditures. The average utilisation of WMA
was lower at ₹187 billion as compared to ₹236
billion in 2014-15. The Government ended the
fiscal year 2015-16 with a cash balance of ₹1,917
billion (Chart VII.2). The WMA limit for the first half
of 2016-17 has been fixed higher at ₹500 billion.
VII.14 Effective December 16, 2014, the
Government’s surplus cash balance with the Reserve Bank is being reckoned for auction at
variable rate repos.
Debt Management of State Governments
VII.15 Gross market borrowings of the states
increased to ₹2,946 billion during 2015-16 through
the issuance of 298 securities as compared to
₹2,408 billion mobilised through 282 securities in
the previous year (Table VII.4). Despite increased
supply, the weighted average yield of SDLs during
2015-16 was lower at 8.28 per cent as compared
with 8.58 per cent in the previous year, reflecting
the easing interest rate regime. However, the weighted average spread over the comparable
central government securities increased to 50
bps from 38 bps during the previous year on
concerns over increased supply due to UDAY
bond issuances.
Table VII.4: Market Borrowings of States through SDLs |
(₹ billion) |
Item |
2013-14 |
2014-15 |
2015-16 |
2016-17
(up to August 16, 2016) |
1 |
2 |
3 |
4 |
5 |
Maturities during the year |
321 |
334 |
352 |
76 |
Gross sanctions under Article 293 (3) |
2,174 |
2,435 |
3,060 |
1407 |
Gross amount raised during the year |
1,967 |
2,408 |
2,946 |
900 |
Net amount raised during the year |
1,646 |
2,075 |
2,594 |
823 |
Amount raised during the year to total sanctions (per cent) |
92.0 |
99.0 |
96.0 |
64.0 |
SDLs outstanding (at the end period) |
10,619 |
12,755 |
16,314 |
17,612 |
VII.16 An investors’ meet was conducted during
the year to increase awareness on SDLs with the
objective of diversifying the investor base among
market participants. Further, capacity building
programmes were conducted in various states
including North-Eastern states to sensitise them
on better debt and cash management.
VII.17 State governments’ borrowings were
unevenly distributed during the year with bunching
in the second half and more so in the fourth
quarter. The Reserve Bank continuously engaged
with the states to smoothen borrowings over the
year, with the objective to lower costs. As part of
this endeavour, state-wise quarterly borrowing
calendar was introduced during 2015-16.
Cash Management of State Governments
VII.18 Investments by states in Intermediate
Treasury Bills (ITBs) of the central government
increased during the year. The daily average
investments in ITBs increased marginally to
₹749 billion in 2015-16 from ₹731 billion in the
previous year. Further, while the outstanding
amount in Auction Treasury Bills (ATBs)
continued to decline in 2015-16, the declining
trend in investments in ITBs reversed over the
same period (Table VII.5).
VII.19 During 2015-16, eleven states availed
Special Drawing Facility (six states in 2014-15),
eleven states availed WMA (10 states in 2014-15)
and nine states availed Over Draft facility from the
Reserve Bank in 2015-16 (10 states in 2014-15).
The monthly average utilisation of WMA and OD
by the states was higher during 2015-16 than that
during 2014-15.
Table VII.5: Investments in ITBs and ATBs by
State Governments/UT |
(₹ billion) |
Item |
Outstanding as on March 31 |
2012 |
2013 |
2014 |
2015 |
2016 |
As on August 12, 2016 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
14-Day (ITB) |
966 |
1,181 |
862 |
842 |
1,206 |
776 |
ATBs |
220 |
286 |
463 |
394 |
383 |
814 |
Total |
1,186 |
1,466 |
1,325 |
1,236 |
1,589 |
1,589 |
Advisory Committee on WMA to State
Governments
VII.20 Pursuant to the recommendations of
the Advisory Committee on WMA to state
governments (Chairman: Shri Sumit Bose) which
submitted its report in January 2016, the WMA
scheme for States was revisited. The aggregate
WMA limit for 28 States and the Union Territory of
Puducherry was revised from ₹154 billion to ₹322
billion, effective February 01, 2016. The other
recommendations of the committee are being
examined and would be implemented in phases.
Investments in Consolidated Sinking Fund (CSF)/
Guarantee Redemption Fund (GRF)
VII.21 Outstanding investments in the CSF
and the GRF maintained by state governments
with the Reserve Bank stood at ₹781 billion
and ₹44 billion, respectively, as at end-March
2016. Total investments in CSF/GRF during the
year aggregated to ₹134 billion (₹141 billion in
2014-15).
Agenda for 2016-17
VII.22 The Union Budget 2016-17 projected
gross market borrowings of ₹6,000 billion through
dated securities, higher by 2.6 per cent than the
actual amount mobilised during the previous
year. Net funding through T-bills for 2016-17 has been budgeted at ₹167 billion, higher by about
₹42 billion as compared to the previous year.
Net market borrowings through dated securities
have been estimated to fund 79.6 per cent of the
budgeted GFD in 2016-17, which is lower than 82
per cent in 2015-16 (RE). Net market borrowings
of States for 2016-17 are budgeted to finance
77.8 per cent of the states’ consolidated GFD. The
borrowing programme of the central and state
governments is sought to be smoothly completed,
while reducing costs and mitigating risks by
adopting the following measures:
i. Continuing the practice of frontloading of
market borrowings through dated securities.
ii. Switching of securities for effective liability
management keeping in view the evolving
market conditions.
iii. Pursuing the objective of elongating the
maturity to contain rollover risks.
iv. MTDS articulated for three years will be
reviewed and rolled over for the next three
years (2016-17 to 2018-19).
v. Cash Coordination Committee (CCC)
comprising members from the Government
of India and the Reserve Bank will work
towards better information sharing, cash flow
forecasting and management.
vi. Features of the SGB scheme launched
during 2015-16 will be improved upon for
greater acceptability and expansion of the
retail investor base.
vii. With the objective of enhancing liquidity and
giving a retail push to the secondary market
for g-secs, a market making scheme will be
formulated.
viii. The Reserve Bank will continue to make
efforts towards market development,
providing greater predictability and ease
of access to the g-sec auction process by
market participants.
ix. Market borrowings of the state governments
will be spread more evenly across the year
along with a more robust quarterly calendar.
x. Reissuances of SDLs of different maturities
will be continued to impart liquidity and better
liability management operations.
xi. The few remaining States which do not
have CSF, will be encouraged to constitute
it to strengthen their debt management
operations.
xii. The remaining issuances of special securities
under the UDAY scheme will be completed
with minimum market disruptions. |